How Malawi government can avoid debt distress

The depressing news this week is that Malawi’s public and publicly guaranteed (PPG) gross debt is worsening both in absolute terms and as a ratio of gross domestic product (GDP).

Finance Minister Goodall Gondwe: Unjust debt burden

This year alone, government plans to borrow from bilateral and multilateral partners around $917 million (about K687 billion) in the 2016/17 financial year to finance several projects even as the country sits on a $2.6 billion debt pile, including $800 million domestic debt.

As a ratio of GDP, the share of debt has climbed from 57 percent in 2012 to 72.1 percent in 2013 and was expected to reach about 76 percent of GDP in 2014.

This steady rise in debt signals an approach to stress levels that the International Monetary Fund (IMF) and the World Bank warn could cripple the economy if left unchecked.

The last time I wrote about the debt situation in May 2015, I did point out that “the huge appetite for treasury bills (TBs) [as well as ways and means advances—a polite term for printing of money]—to finance the recurrent budget in the wake of budgetary support freeze, Capital Hill’s atrocious debt management, reckless spending and brazen theft as seen in Cashgate, is the major source of the domestic debt pile up.”

But what is also driving public debt, especially that which is externally financed, are the not-so- concessionary loans from India and China, which, while they also have grace periods, attract higher interest rates than multilateral lenders such as the World Bank, the African Development Bank and the European Investment Bank (EIB).

I also pointed out that for some time, Malawi spelt out a policy of only borrowing concessionally and mostly for investment or production to ensure that borrowed finances generate resources either directly or indirectly through multiplier effects to enable the country to repay the loans from returns on investment. This has an effect on borrowing costs for a country and the yields on government securities; hence, critical.

That has not been the case so far; hence, our debt levels are now putting the country into the distress status and inching it towards unsustainable levels, I said.

“There are several cases where we have borrowed purely for consumption, thereby adding unproductive burdens. Where we have borrowed for investment such as road construction, water supply, the Greenbelt Initiative and others, we have mismanaged everything—in the end; we have paid dearly in penalties, price adjustments and repayment costs.

“Just look at the money we borrowed for the Thyolo-Thekerani, Zomba-Jali-Phalombe-Chitakale roads several years ago. The roads are way behind schedule and yet we may have to start repaying even before the infrastructure has contributed to the economy.

Look at the Umodzi Park comprising the hotel, conference centre and presidential villas in Lilongwe. We got an expensive loan from the Chinese, built the hotel then left the commercial venture idle for years as politics ruled supreme in deciding a contractor to run it. Not only did the complex accumulate billions of kwacha in avoidable bills during its non-productive years, we also may have to start paying for it even before it starts generating resources.”

So, how can Malawi avoid a return to unsustainable debt levels that haunted it throughout the 1990s and up to 2006 when we achieved debt relief?

First is to ensure that external public debt should only be sought from multilateral lenders whose concessionality is much more favourable. If we must borrow from bilateral partners, then we must push for better terms than we currently get.

Second, we must grow the economy and so far the country is failing miserably. Capital Hill projected that GDP would grow by 5.1 percent in 2016.

I questioned the source of this optimistic growth the day it was announced and argued that it would be much lower. The IMF and Economist Intelligence Unit vindicated my position months later, forecasting that the economy would inch up by just under three percent—too low to generate resources for retiring debts and creating new wealth in the economy. More work need to be done to grow the economy if we are to move out of the vicious debt cycle.

Third, Malawi must bring down the inflation rate to single digits from the current 22.6 percent to help bring down inflation and cut the cost of servicing debts. The criticality of price stability cannot be emphasized. This should also be read together with the need to stabilize the exchange rate.

Fourth, the country must work harder to attract foreign direct investment to inject new capital to create new wealth and jobs.

“Malawi must bring down the inflation rate to single digits from the current 22.6 percent to help bring down inflation and cut the cost of servicing debts. The criticality of price stability cannot be emphasized.”